Danby Bloch: Is your risk committee doing its job?

We have a board committee at Helm Godfrey that looks at the key risks facing the business. The core document is the risk register. One of the issues we have been considering lately is whether we are actually providing the ongoing reviews and other services to clients that we said we would.

Advice firms need systems and checks that mean they can keep a grip on what is going on, and these need changing from time to time. The old ways of working that operated under the commission system are no longer good enough.

If your firm does not have a risk committee, it is probably time to set one up. And if you do have one already, why not have a think about whether it is really doing its job.

An important item of management information is the level of service commitment to each client and the basis of adviser charging that has been agreed. For example, an adviser would agree with a client to conduct a review, say, every six months, either at a meeting or by some other mutually acceptable means of communication, and carry out rebalancing at agreed intervals, as well as providing various other services.

The main question then is whether the firm’s systems clearly show that advisers and their teams are carrying out these activities for all clients or not.

It is not good enough to have the detailed agreement on the file – although a copy should be there. The arrangements need to be summarised so that the adviser and their team can plan their future work. What is more, it is essential the firm can store the data centrally to check the overall pattern and level of business, and the extent to which advisers are doing what they told clients they would do.

Monitoring and control are much more effective if there is a simple system of categorising the levels of service to different types of clients, the services they receive as well as the charges they pay. The more complicated the range of individual deals with clients the greater the risk that something will go wrong – especially if an adviser is dealing with lots of clients.

The old system of tracking new business – essentially by recording purchases of new products – had to change. Adviser firms are selling advice rather than products. Advice may lead to a product sale but on many occasions it might not. And the amount and value of advice might well not be closely related to the subsequent transaction.

So one of the key records that must be on every file is a that of advice, not just of business transactions. Some firms received a wake-up call earlier this year when the FCA asked for details of advice given rather than business transacted. Firms with only new business registers and not advice registers were given pause for thought.

Firms should ask themselves how good their management information is at showing what advisers should be doing for clients and comparing that with what they are actually doing.

You might ask what the risks are for the firm if an adviser fails to carry out the reviews and other services clients have been led to expect. First of all, there is a commercial risk. Clients might walk if they do not see value for money.

Most clients seem to be accepting adviser charges of anywhere between 50 basis points and 100 bps, and in some cases more. Chances are they will continue to pay them if they see real benefits. But they will not if they do not see some return for the thousands of pounds they pay.

Another commercial risk is that advisers give advice without charging for it. There may be circumstances in which that is appropriate but too much of it in an uncontrolled way could result in a serious loss to the firms.

Then, of course, there is a regulatory risk. Clients who do not get what they expect might well complain and complaints can lead to scrutiny – especially under the new reporting regime.

Firms also need some means of checking their management information. A new business register of transactions is still important. You can use it to identify advice events that might not have been recorded. Likewise, information from platforms can be a great source.

Your risk committee should be at the heart of identifying risks, deciding what actions to take about them, and overseeing the design of information and other systems to reduce them and monitor outcomes.

The committee should consist of individuals that really understand the business, are prepared to ask honest, difficult and sometimes embarrassing questions, and can sniff out unconvincing answers. It also makes sense to have an expert outsider on it if you can find one.

The risk register is one of the management tools that could help keep you out of trouble, as it might with the issue of whether you are actually doing for clients what you agreed with them.

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